Markets & Finance

Stocks: The Great Rebate Race

Which outfits will grab the largest share of consumers' stimulus checks? Here are some potential winners

The U.S. government is so eager to jump-start the economy with its stimulus package that the Treasury Dept. is even mailing rebate checks to the recently deceased. George Paquin, a financial planner in Chelmsford, Mass., is certain that one former client, who died last year, would have deposited the check in his bank account. But his daughter and executor will probably spend it on furnishings for her new home. Dead or alive, a customer with a rebate check would be a welcome sight at many retailers. They've seen their profits plunge amid a worsening economy and sharply higher food and energy prices.

From May through July, 130 million Americans are expecting to get rebate checks. Not everyone is so sure, however, that the $600 to $1,800 doled out to each eligible household will be used for discretionary purchases, as it was the last time such checks went out, in 2001. The earlier slowdown was a business-led recession and didn't cut very deeply into consumer confidence, while this time consumers have been hammered on all sides by falling home prices, maxed-out home equity, and surging food and gasoline prices, says Chris Sunderland, senior portfolio manager in the global fundamental strategies group at State Street Global Advisors (STT) in Boston.

Heavy Debts to Pay Off

Unlike seven years ago, the rebates in the new stimulus bill aren't attached to a long-lasting tax cut, which means they may only temporarily boost household income, analyst Michael Exstein wrote in a research note for Credit Suisse Equity Research (CS) on May 6. And in view of an 80% leap in household debt—consumer credit plus mortgages—since 2001, "with no further tax cuts in sight, consumers may elect to save or pay down debt rather than spend their rebate checks this time around," Exstein wrote.

If that's true, credit card issuers like Capital One Financial (COF) and American Express (AXP) could be the main beneficiaries.

But the paydowns probably won't result in permanent debt reduction for most families, since all they're doing is increasing the credit available to them and are likely to charge their cards back up as the holidays approach, some analysts say. In that case, the rebates will eventually flow into the economy one way or another.

A Hunt for Bargain Luxuries

Doug Roberts, chief investment strategist at ChannelCapitalResearch.com, based in Shrewsbury, N.J., sees the rebate checks affecting people according to how dire or comfortable their financial conditions are. Those who are down and out and falling behind on their mortgage payments and other bills will probably pay down their highest-cost loans, says Roberts, while those who are doing all right but are fearful about the future may spend on an affordable luxury item—but only if they can get it at a considerable discount.

"Instead of going on vacation, maybe they'll have a barbecue in their backyard and barbecue a steak [from a discounter like Sam's Club], not a burger," he says. "They're not going to spend on big-ticket items."

For the third group, those who are more affluent but still under the program's $150,000 household income ceiling, the rebate checks won't have much impact on their normal spending patterns, he says.

With food and energy prices continuing to go up and consumers anticipating more layoffs and declining income levels, many investment strategists believe consumers will have no choice but to put the money toward bare necessities that have strained their budgets in recent months. April's consumer price data showed an 18% jump in food prices from the same month last year, while gasoline prices averaged $3.79 a gallon across the U.S. last week and are projected to top $4.00 if the price of oil hits $150 per barrel, now less than $17 away.

Grocery Come-Ons

Most grocers are doing some kind of promotion, such as a 10% discount, in order to attract the rebate checks, says Karen Short, an analyst at Friedman Billings Ramsey (FBR) in New York. The incentives tend to be based on loyalty gift cards to reward repeat customers, and assorted tiers of discounts will be offered depending on how much a customer is spending at the store, she says.

But the current economic environment is different from prior periods when the economy has been weak.

"Where is the pent-up demand? Is it for iPods, or for stocking up your shelves and potentially paying down debt?" she wonders. "I think the pent-up demand now is probably to get ahead on your food bills, so I think Kroger (KR) is very well-positioned to benefit from the environment and from offering incentives."

The Netherlands' Ahold (AHONY) should also do well since the Stop 'N Shop grocery chain that it owns is also offering a discount gift card to customers.

Weighing the Cost of a Drive

While all companies scheduling sales to coincide with the rebates should see some benefit, retailers such as Wal-Mart Stores (WMT), Costco Wholesale (COST), and BJ's Wholesale Club (BJ) are better positioned for success by being able to undersell other retailers, says Roberts.

But FBR's Short counters that discounters don't have as much of an advantage as they once did, because companies such as Kroger have lowered their prices to better compete with them.

"Now the price discrepancies with Wal-Mart are nowhere near where they were in 2001. With gas prices what they are, that drive to Wal-Mart isn't nearly as appealing," says Short. The higher price of gas means consumers aren't saving enough on a basket of food to make the gas expenditure worthwhile, she adds.

Other players think that because rising prices for basics such as food have forced consumers to put discretionary purchases on hold that some will feel they deserve a reward for being so disciplined up until now. If that's the case, strategists expect apparel and electronics retailers to benefit most.

Like "Found Money"

Karen Altfest, a financial adviser in New York, said that the rebate check a recently retired client is eagerly awaiting is making her feel more confident about buying a rug at a designer home furnishings store that she has had her eye on for months, even though she has saved a considerable amount of money and can well afford the purchase.

Sunderland at State Street expects those stores selling mid-to-lower-end products to do best, because "$100 to $500 is the sweet spot to capture that rebate check," he says. Accessories such as handbags, jewelry, and "other feel-good items" should be big draws for consumers, he predicts.

Since some people view the rebate checks as "found money," the money could go toward upgraded television sets, stereo equipment, or computer gaming gear sold by Best Buy (BBY) and Circuit City Stores (CC), says Daniel Binder, an analyst at Jefferies (JEF) in New York,

Best Buy has built in some benefit from the rebates but hasn't said how much they would add to earnings, says Binder, who thinks the earnings boost has been fully priced into the stock price. He says the rebates could contribute a full percentage point to comparable-store sales growth this year.

A Night on the Town?

But a family night out at a restaurant or the movies may be all some families will permit themselves, given how worried they are about the future.

Restaurant outfits like Darden (DRI) that have reasonable prices will attract customers as the stimulus checks encourage people's need to get out and do something for themselves, says Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.

Viacom (VIA) could benefit from two likely blockbusters from its Paramount Pictures unit—Iron Man, already a commercial hit, and Steven Spielberg's latest addition to the Indiana Jones franchise, which opens May 22. Disney (DIS) could also do well with its release of Prince Caspian, the second in the Chronicles of Narnia series.

To the extent that the rebates do translate to something of a windfall for consumer discretionary companies and restaurants, the impact on revenue and earnings will be limited to one quarter, says Dean Junkans, chief investment officer at Wells Fargo Wealth Management Group (WFC) in Minneapolis. "It might be close to 15% of personal disposable income for the second quarter, but I don't think it has legs beyond that," he says.